On February 26, 2014, the Supreme Court, in a 7-2 ruling, held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), which forbids plaintiffs from bringing securities class actions for violations of state law where the plaintiffs allege “a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security,” does not prevent plaintiffs from bringing class actions based on state law where plaintiffs allege that they purchased uncovered securities (in this case, certificates of deposit sold by Stanford Bank) based on defendants’ misrepresentation that the uncovered securities were backed by covered securities. Chadbourne & Parke LLP v. Troice, 571 U.S. ___ (2014). The Court specifically held that “[a] fraudulent misrepresentation is not made ‘in connection with’ such a ‘purchase or sale of a covered security’ unless it is material to a decision by one or more individuals (other than the fraudster) to buy or to sell a ‘covered security.’” In other words, the Court held that SLUSA does not prohibit state law claims “when the fraud bears so remote a connection to [a covered security] that no person actually believed he was taking an ownership position in [a covered security].”

In so holding, the Court pointed to the narrow scope of “covered securities,” which SLUSA defines to include only securities traded on a national exchange or issued by investment companies, and noted that SLUSA “expresses no concern” regarding the purchase or sale of uncovered securities. The Court found that its interpretation of the “in connection with” requirement supported Congress’s goals in enacting SLUSA—reduction of abusive class-action lawsuits and mitigation of legal costs for firms and investment professionals that participate in the market for nationally traded securities. The Court also noted that its interpretation of SLUSA’s “in connection with” requirement is consistent with the same requirements in the Securities Act of 1933 and the Securities Exchange Act of 1934, which apply to a much broader definition of “securities,” including any note, stock, treasury stock, security future, security-based swap, bond, debenture, or certificate of deposit for a security.

The dissent and an amicus brief filed by the SEC expressed concern that a narrow interpretation of “in connection with” could limit the Commission’s authority, but the Court dismissed these concerns by noting that SLUSA is inapplicable to the government, whose authority extends to all “securities” and is not limited to “covered securities.” The Court also noted that neither the SEC nor the dissent had identified a single enforcement action that the Court’s decision would have prevented the SEC from bringing. Indeed, all of the proceedings identified by the SEC involved defrauded investors who had tried to take an ownership interest in the relevant securities and would thus satisfy the Court’s interpretation of the “in connection with” requirement.